I am reasonably certain that the economy is still in recession. If not (and this is ultimately up to the NBER to decide), the pending disaster in housing and commercial real estate will seal the double-dip deal.

Either way, the prognosis is not good, as economic conditions are deteriorating rapidly. With that thought in mind, please consider Housing Slide in U.S. May Drag Economy Into Recession

“If foreclosures continue to mount and depress home prices, that could send the economy back into a recession,” said Celia Chen, an economist who tracks the industry for Moody’s Analytics Inc. “The housing market and the broader economy are closely intertwined.”

With 14.6 million Americans out of work, homeowners are struggling to hold onto their properties. One in seven mortgages were delinquent or in foreclosure during the first quarter, the highest in records dating to 1979, according to the Washington- based Mortgage Bankers Association. Foreclosures probably will top 1 million this year, said RealtyTrac Inc., an Irvine, California-based data company.

Federal efforts to help have had little success. Of 1.31 million loan modifications started under the Obama administration’s Home Affordable Modification Program, 48 percent were canceled by the end of July, the Treasury Department said Aug. 20. More than half of all modifications defaulted again within 12 months, the Office of the Comptroller of the Currency said June 23.

Shadow inventory, or the number of homes repossessed or in default that eventually will be offered for sale, stood at 7.3 million in the first quarter, according to Laurie Goodman, an analyst in New York at mortgage-bond broker Amherst Securities Group LP. As those properties hit the market, prices will come under pressure and buyers will wait for better deals.

“The only thing that’s going to fix the housing markets right now is a work-through of what excess supply is on the markets and improvement in unemployment,” Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said today in an interview on Bloomberg Television’s “In the Loop with Betty Liu.” “That process is a very, very long-term process.”

Consumer spending rose 1.6 percent in the second quarter, down from 1.9 percent in the previous three months. Purchases of home furnishings and appliances fell 1.7 percent to an annual pace of $256.5 billion in June from a 2010 high in April, according to the Bureau of Economic Analysis.

“There is an epidemic of thrift,” said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts. “Households and businesses are super-cautious right now. Sometime in the next 6 to 12 months, we’ll start to see more movement on home and car purchases and greater willingness on the part of businesses to hire.”

Epidemic of Thrift vs. Leap of Faith

Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts correctly says there “There is an epidemic of thrift”.

Indeed there is, and actually it is a good thing! Consumers need to deleverage and they are.

Unfortunately Behravesh blows it with “Sometime in the next 6 to 12 months, we’ll start to see more movement on home and car purchases and greater willingness on the part of businesses to hire.”

Excuse me for asking but … Small Businesses are Not Hiring – Why Should They?

As is typical of most economists, Behravesh displays an amazing and unwarranted leap of faith.

Structurally High Unemployment for a Decade

Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC has it correct: It will take a “very, very long-term process” to fix this mess.

Consumer demand is dead. That demand is not coming back anytime soon, and there is no driver for jobs if it doesn’t. Unemployment and GDP will both be extremely weak for the duration.

Harsh Reality From Bernanke

In the Incredible Shrinking Boomer Economy I noted a harsh reality quote of Bernanke:

“It takes GDP growth of about 2.5 percent to keep the jobless rate constant. But the Fed expects growth of only about 1 percent in the last six months of the year. So that’s not enough to bring down the unemployment rate.”

I wrote that in July of 2009. Nothing has changed.

Indeed, 3rd Quarter GDP Likely Negative, Recession Never Ended

Pray tell what happens if GDP can’t exceed 2.5% for a couple of years? What about a decade (or on and off for a decade)?

If you have come to the conclusion that we are going to have structurally high unemployment for a decade, you have come to the right conclusion. Ask yourself: Is that what the stock market is priced for?

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

This morning, NAR will release the Existing Home Sales figures for he month of July. Analysts expect homes to be selling at a seasonally-adjusted rate (SAAR) of about 4.65 million homes, but regional reports suggest much lower figures, perhaps even under 4 million.

July marks the first month where homes closed were not eligible for the federal homebuyer tax credits and will give us a hint of exactly how well the housing market is able to stand on it’s own, without as much government support. The report should be ugly, prompting fears of a double-dip recession, additional declines in house prices, and lots of chatter about whether the tax credits actually accomplished anything.

Regarding home prices, the most important part of the NAR release will be Months-of-Supply. This figure is calculated by taking the number of homes actively for sale, divided by the number sold in the last month. Months-of-Supply is a powerful predictor of how home prices will change in the coming months. Here’s why:

Pretend that in a given neighborhood, there are 10 homes for sale, and 2 are selling each month. In this example, there are four unsold homes each month for every sale. That means there are only four homes that could potentially lower their price to increase their odds of selling the next month. This is a pretty stable or even bullish scenario.

Now, imagine the same neighborhood a few months later. Pretend there are now 12 homes for sale, but only one home is selling per month. That’s a whopping 12-Months-of-Supply with eleven homes potentially lowering their prices. With only one home selling, sellers would need to cut their prices to ensure that they were the best, or one of the best deals available. You can imagine that the higher the Months-of-Supply goes, the more fierce the price reductions are.

During the peak of the housing bust (before government foreclosure, tax credit, and interest rate intervention), national Months-of-Supply reached a high in July of 2008 at 11.2 months. National home prices were tumbling at about a 20% per year pace.

Record Months-of-Supply?

Today’s Existing Home Sales figure could push Months-of-Supply over that 11.2 level, an ominous sign for housing going forward.

If there were just 4 million home sold (SAAR) and inventory held steady at 4 million units, we would have a record 12 Months of Supply

Though home prices didn’t start turning down until 2006, the housing market begin it’s downturn in the Fall of 2005. Back then, I never would have guessed that, after five years, we would still have so many foreclosures still ahead of us.

Changing Winds

In the Summer of 2005, the housing market frenzy was palpable. People were camping out for new home releases and nearly every home on the market was sold with multiple-offers. Everyone was trying to buy investment property: hair-dressers, cab-drivers, maids, even college kids. Both inside the real estate community and out on the streets, nobody doubted that home prices would keep rising. Everyone was making money.

I was selling real estate in Modesto, where home prices had doubled since 2002 and quadrupled since the mid 90s. My wife and I bought an older, modest, 3-bedroom there home at the end of 2003, for $271,000.

Modesto, today, is one of the housing bubble’s poster-children. But back then, outside money was flowing into the city. Bay Area commuters were buying $600,000 McMansions that would have cost seven-figures closer to the Bay. And investment money, both from the Bay Area and overseas, couldn’t buy Central Valley housing fast enough.  Developers were gobbling up farmland at $500,000-$600,000 an acre and cities were expanding as quickly as they could.

And, though nobody talked about it much, fraud was everywhere. It seemed like everyone used no-doc “liar” loans and straw-buyers were everywhere. Everyone, it seemed, used Countrywide, New Century, or WaMu.

Readers of this blog know that I’m a data geek; and I studied the bubble forming just as intensely as I’ve studied it’s bursting. Just before Labor Day in 2005, I watched a couple of $300,000 listings hit the market that should have sold immediately. They didn’t. I talked with a client of mine who had been looking in that price range and he said he wanted to “wait and see what happens.” Right then, I knew it was over.

The wind had begun to blow the other direction. Almost overnight, the housing bubble began to deflate.

Supply Overtaking Demand

Even though the market began to change in the Fall of 2005, home prices didn’t peak in most parts of California until the Spring of 2006. Price follows volume. It simply took 6-8 months of lower demand for the inventory balance to stabilize, then eventually swing to an oversupply and falling home prices.

The turning point seemed to come once a neighborhood passed about 3-months of inventory. That is, take the number of homes for sale, divided by the number actually sold (not pending) in the last 30 days.  Below 3-months, prices still rose. Above 3-months, they fell. Way above 3-months, they fell faster.

NOTE: Nationally, home prices are stable if there is a 4-5 month supply of homes. Here in California, prices fall sooner, probably because Sellers here expect to sell more quickly than in other places.

It’s Now or Never

Seeing the writing on the wall, my wife and I quickly put our home on the market, sold it for $385,000, and moved to Danville at the end of 2005, where we’ve been happily renting ever since. At the time, I figured that prices would fall nearly as quickly as they rose and that homes in both Danville and Modesto would fall by half or so within 3-4 years. I figured it would be painful, be we would all survive.

I was right about Modesto, but high-end communities like Danville rallied on for another year.

High, Sticky Prices

Danville, Alamo, and other high-end Bay Area communities held their home prices up all the way into 2007 before the declines began. Maybe the Kool-Aid was more potent, maybe maybe homeowners had higher credit card limits to mask their problems…certainly there is a lot more legitimate wealth here than in the Central Valley.

People here felt that this area was different: those other areas were subprime while we are Alt-A!

By 2008, high-end home prices were undeniably in decline, perhaps off 20% or more from the peak and falling. By contrast, Modesto, as well as all of the similar Bay Area towns like Antioch, Brentwood, and Concord, were down an incredible 60-70%.

Than, in the Fall of 2008, the Government began to intervene.

The first foreclosure moratorium happened in August of 2008 and carried through the Holidays. Through a combination of official and unofficial moratoria, and various “extend and pretend” policies, banks still aren’t foreclosing even today.

As a result, the lower-end communities have seen their housing supply fall back under 3-months and prices are up 20+% off of the lows. High-end communities like Danville, where the average price is probably down 30%-35% from the peak, have seen prices stay mostly flat for the last year.

Most of the high-end homes that would have been foreclosed and sold as REOs or listed as short sales are instead stuck in shadow inventory purgatory. Some are attempting modifications. Others are simply squatting and enjoying living here for free.

Demand is low, but supply is low as well. The high-end market is neither getting better or worse, just wasting time.

I don’t know where high-end prices will go. I can say that I saw a home near where I live that I liked very much: 2,400 on a big lot and in good condition. At the peak, it could have been $1.1M-$1.2M. Recently, it was listed for about $800,000. But, in 1998 (also in great condition), it sold for  $390,000.

Eye of The Storm

California’s Housing Market is enjoying the Eye of The Storm. We were battered from 2005-2009, but have enjoyed a Government-induced break for the last year.

Looking forward, we have massive storm clouds approaching. The shadow inventory is huge. Housing Supply is growing while Demand is falling. Unemployment is getting worse, not better. Social unrest is rising around the globe. Iran’s got nukes. And, the recession is already double-dipping, with potentially-negative GDP in Q3.

What’s more, NAR is about to release July existing home sales which should massively disappoint and push the national months-of-housing-supply well into the double digits. This should sharply darken social mood towards housing and homeownership going forward.

The Government will do everything it can to bask in the Eye a little longer – at least through the elections – but eventually it will start rain again.

How Far We’ve Come

The shadow inventory is now estimated to be around 7 million homes. But nobody can really say because, if home prices begin to spiral downwards again, the number cold balloon much higher. Home prices, and possibly our entire economy, will not hit bottom until we undo all of the real estate transactions that never should have happened.

So, after 5 years, how much progress have we made?

My best guess, to use a baseball analogy, is that we’re in the third inning. At this rate, it could be decades before this housing mess is behind us.

Doug Reynolds, a Sacramento Realtor, provides an analysis of the local market. This month focusing on the “Double-Dip” that is starting in the Sacramento Real Estate Market. An analysis of past, present and future. More information can be found at his website, www.BuyWithDoug.com, as well as his blog and Facebook page(Doug Reynolds Real Estate).

Housing statistics for July 2010 were just released by the Sacramento Association of Realtors.  The “double-dip” that most economists have been talking about and predicting is starting to show up in the statistics.  Let’s take a look at the numbers for July, then a current rundown of the market and prediction for the rest of the year and heading into 2011.

July 2010 Sacramento County Housing Statistics:

 There are 3 key statistics:

       Median Price: the median price of a home in July dropped 4.6% from $194,000 to $185,000. After five straight months of an increase.  Also, the median price had been on an upward trend since February 2009 when it bottomed out at $167,000.

       Total Number of Closed Escrows: Closed sales dropped a whopping 23.3% from 1,777 to 1,363.  That’s a significant drop in closed sales compared to June.

       Months Inventory: The months of inventory increased 40%.  That’s due to less sales and more homes on the market.

Current Market Observation:

The market has really slowed down over the past two months.  Right now, homes that would have sold for over list price with multiple offers within a few days back in March and April are now sitting on the market for weeks with very few buyers looking at them and then eventually getting an offer.  What happened was the tax credit caused many buyers to get into the market earlier than they would have naturally.  So, this spring (if you follow my blog and video updates regularly) there were way more buyers than homes available.  Most of those buyers were able to get a property before the tax credit cut off.  The group of buyers that missed out continued their pursuit causing the market to stay hot for a few more months.  Beginning around June, those buyer all had found properties and very few new buyers have entered the market.  Since June, houses are sitting longer and multiple offers are a little more rare.  This is finally being reflected in the statistics for July.

Looking Ahead:

This is purely my thoughts and predictions based on what i see on a daily basis and have to pull from experience of annual sales cycles.  I feel like most economist are correct in that Sacramento is going to experience a “double-dip” in the real estate market.  Meaning, the market dropped from 2006 to 2009.  In 2009 things stabilized and increased throughout the year and into summer 2010.  Now, i believe the market is headed for a small drop from now until the spring of 2011.  Sales have slowed down.  Buyer activity has slowed down.  Inventory in turn is now increasing some.  In no way do i believe we are headed for a drop like we had from 06 to 09 but i feel the median price will decrease and buyer strength will rise from now until spring.  A few factors support that. One being less buyers as mentioned before.  Another being the fall and winter months are fast approaching.  These times of year historically have slower sales than spring and summer due to cold weather, no daylight savings, kids in school and the holidays.  My prediction is a small adjustment from now until April 2011 and then at that point a very flat market in Sacramento for a year or so.  Meaning prices won’t swing much higher or lower.  Hope you enjoyed my past, present and future analysis.  Let me know your thoughts and opinions.  I’m curious to hear what others think and are seeing. 

Bottom line, i think buyers are going to get some great deals this winter in Sacramento.

clear skies,

doug reynolds

www.BuyWithDoug.com

Now that the disappointing HAMP program is winding down, the time has come for the Government to try their next plan to save the housing market. Today, HUD unveiled the FHA Short Refi program, designed to refinance first-mortgages with a cooperating principal write-down from the existing lienholders.

This program has some real potential as well as some obvious shortcomings. Importantly, this could provide infrastructure for more aggressive principal write-downs in the future.

From HUD: FHA LAUNCHES SHORT REFI OPPORTUNITY FOR UNDERWATER HOMEOWNERS

In an effort to help responsible homeowners who owe more on their mortgage than the value of their property, the U.S. Department of Housing and Urban Development today provided details on the adjustment to its refinance program which was announced earlier this year that will enable lenders to provide additional refinancing options to homeowners who owe more than their home is worth. Starting September 7, 2010, the Federal Housing Administration (FHA) will offer certain ‘underwater’ non-FHA borrowers who are current on their existing mortgage and whose lenders agree to write off at least ten percent of the unpaid principal balance of the first mortgage, the opportunity to qualify for a new FHA-insured mortgage. The FHA Short Refinance option is targeted to help people who owe more on their mortgage than their home is worth – or ‘underwater’ – because their local markets saw large declines in home values. Originally announced in March, these changes and other programs that have been put in place will help the Administration meet its goal of stabilizing housing markets by offering a second chance to up to 3 to 4 million struggling homeowners through the end of 2012.

“We’re throwing a life line out to those families who are current on their mortgage and are experiencing financial hardships because property values in their community have declined,” said FHA Commissioner David H. Stevens. “This is another tool to help overcome the negative equity problem facing many responsible homeowners who are looking to refinance into a safer, more secure mortgage product.”

Some details:

• The home must have negative equity
• The borrower must be current on their payments (though it isn’t clear about having late mortgage payments on your credit)
• The first lienholder must agree to write-down the loan by at least 10%
• The new first (FHA) loan Loan-to-Value cannot exceed 97.75%
• New combined Loan-to-Value cannot exceed 115%
• Homeowner must be current on their mortgage (and the bank can’t simply forgive the arrears to make them current)
• Primary residences only
• Borrower must qualify under FHA underwriting standards with a minimum FICO score of 500
• The short payoff to the first lienholder will serve as payment-n-full and the debt is then extinguished
• Permanent HAMP mods can apply
• Temporary/Trial HAMP mods cannot
• Any second-leinholders that agree to write-down their balance to achieve the max 115% LTV are eligible for a $500 bonus.

Why this could work

Banks can offload mortgages for 97.75% of the appraised value. With a foreclosure or a short sale, they aren’t going to get anywhere near that amount of money. Plus, the program requires borrowers to be current – meaning  a lot of late homeowners are going to get caught up in order to apply.

Why it won’t

Banks will have no incentive to write-down performing loans and are under no pressure to grant them. They may choose to try this with high-risk option-arm and alt-a loans, where the default percentages are high. However, those borrowers won’t be interested – the only way they can afford the property is with gimmicky payments and FHA loans are conventional.

Besides, a lot of would-be defaulters would still walk away even at 115% LTV.

How this lays the groundwork for more aggressive principal reductions in the future

To make even a few of these Short Refi’s work, the FHA will need to build and perfect a system to coordinate and negotiate  with the first lender, second lender, any other lenders, and the borrower. This system could be the mechanism for more forceful write-downs in the future.

The initial FHA Short Refi Progam will be a failure, with few successful refinances to report. Over time, the government will be forced to give more and more incentives to lenders to participate. Eventually, The Fed may end up reimbursing banks for a percentage of the principal reduction.

I still think bankruptcy cram-downs are a better idea, but this is the direction we’re headed.

One thing is for sure: expect more foreclosure delays as borrowers apply for FHA Short Refi’s.

Danville’s 94526 zip code is always has one of the highest median prices in California. As such, it’s no surprise that Danville home prices are always a hot topic of conversation.

Danville home prices certainly got out of control during the peak of the housing bubble. Since, they have fallen about 30% on average. Where to from here? Sometimes a good graph can help provide some perspective.

San Francisco Real Estate Broker, Analyst, and friend of mine, Andrew Jeffery, put together this historical graph of Danville home prices per square foot:

Danville isn’t know for sky high foreclosure rates like other cities in Contra Costa County, but it’s housing market has certainly not been spared from its share of pain. With prices down almost 30% from their peak, the city has been spared the worst of home price declines in the area, with prices are only back to levels not seen since 2003. Nevertheless, Danville has most of what suburban home buyers want: Good schools, quiet safe streets and a bustling downtown. One negative, however, is that it’s a 15 minute drive to the nearest BART, so the commute into San Francisco isn’t the best.

Unfortunately, his data comes from the MLS, which only goes back about 13 years. Going deeper into the 1990′’s, prices hovered closed to $150 per foot. So, today, prices are still about double what they were then.

Will Danville prices hold at this level? Or will they recede further as prices in other communities have?

Flashback: Should homes be worth twice what they were in 1996?

Looking at long-term trends, we each must fall into one of two camps. Either you believe that, eventually, home prices will revert back to their relative historical norm because people can only pay so much of their monthly income for housing.  OR, you believe that this time really is different; that people going forward will be willing to pay relatively more each month for shelter than for the last 120 years.

I don’t see how this time is different. I don’t know why, socioeconomically, people will pay more of their monthly paychecks for housing over the next 120 years than they did for the last 120. Sure, you can make a case that a particular neighborhood or town has become more desirable, but that is irrelevant on a national scale.

In short, if you believe that the economic growth since 1996 was robust enough to justify the doubling of home prices during that time, then perhaps home prices are now at the “correct” levels.  But if you believe that most of the economic growth since 1996 was built on bubbles and debt, then it’s hard to find a reason why homes should be twice as expensive.

A case can certainly be made that Danville has separated itself from the surrounding towns. Wealth has concentrated here. It has become relatively more desirable today than it was in the 1990’s. Ask any Danvillian and they’ll tell you this is the case.

But is it enough?

What will this graph look like in a year? Keep reading this blog and I’ll keep you posted.

Today’s employment figures came in well-below forecasts. Additionally, June employment was revised downwards, with an additional 96,000 jobs lost.

Here is everything you need to know about today’s unemployment report…

From the BLS:

Total nonfarm payroll employment declined by 131,000 in July, and the unemployment rate was unchanged at 9.5 percent, the U.S. Bureau of Labor Statistics reported today. Federal government employment fell, as 143,000 temporary workers hired for the decennial census completed their work. Private-sector payroll employment edged up by 71,000.

…

Government employment fell by 202,000 in July, largely reflecting the loss of 143,000 temporary workers hired for Census 2010. Employment in both state and local governments edged down over the month.

Regarding discouraged workers:

About 2.6 million persons were marginally attached to the labor force in July, an increase of 340,000 from a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

Among the marginally attached, there were 1.2 million discouraged workers in July, up by 389,000 from a year earlier. (The data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.4 million persons marginally attached to the labor force had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities.

From Calculated Risk:

The reason the unemployment rate was steady at 9.5% was because people left the workforce – and that is not good news. As the employment picture improves, people will return to the labor force, and that will put upward pressure on the unemployment rate.

The Labor Force Participation Rate decreased to 64.6% from 64.7% in June. This is the percentage of the working age population in the labor force. This decline is very disappointing, and the rate is well below the 66% to 67% rate that was normal over the last 20 years.

The dotted line shows the impact of Census hiring. In July, there were 196,000 temporary 2010 Census workers on the payroll. The number of Census workers will continue to decline – and the gap between the solid and dashed red lines will be gone in a few months.

On long-term unemployment:

The number of long term unemployed might have peaked … perhaps because people are giving up.

The New York Times adds:

Although the unemployment rate did not worsen, that was in part because people continued to leave the labor force, which means they simply stopped looking for work during the month. In July, 181,000 people left the labor force.

With some economists predicting a “double dip” back into recession and the political stakes for the Obama administration rising as the weeks tick closer to the midterm elections, Friday’s unemployment report renewed pressure on lawmakers to consider the next steps they might take to bolster the economy.

And Robert Reich chimes in:

Remember, we need 125,000 new jobs per month simply to keep up with the growth of the American population seeking jobs.

…

In other words, the hole keeps getting deeper.

Proving again that different conclusions can be drawn from the same data, Morgan Stanley is contradicting Case-Shiller’s claim that Bay Area home prices rose by 1.7% from April to May. According to Morgan Stanley, San Francisco MSA home prices actually fell by 1.2 percent.

The Case-Shiller claim was suspect to begin with.

Flashback: Are Bay Area Home Prices Really Up 18 Percent?

For more detail, Case-Shiller also breaks down each MSA into price tiers and tracks the performance of the top, bottom, and middle thirds. One would think that these tiers would reflect the 18.3% boost, but, strangely, they don’t.

By my calculations, the lower third has appreciated by 14.9%, the middle third by 12.8% and the top third by just 8.3%.

These numbers certainly seem more believable (at the lower tier anyway).

But, if no segment of homes even appreciated by 15%, how can the index say that the MSA appreciated by 18.3%?

Morgan Stanley broke the data down a different way. They removed all of the short sales and foreclosures and looked only at regular, non-distressed sales.

BusinessWeek reports:

San Francisco prices fell 1.2 percent while New York gained 0.8 percent in May, Morgan Stanley said in a report, which looked at homes that weren’t in foreclosure or involved in a short sale, in which a buyer pays less than the amount owed on the mortgage and the bank agrees to take a loss.

Short sales increased by 30 percent nationwide over the past year, destabilizing the housing-price indexes, said Oliver Chang, a U.S. housing strategist at Morgan Stanley who co-wrote the report. Proceeds from short sales are 15 percent to 40 percent more than foreclosed homes, driving up S&P/Case-Shiller indexes even when values of non-distressed homes are falling, Chang said.

“There’s a price premium you can get from a short sale,” Chang said in a telephone interview. “That makes it look like prices are going up when they’re not.”

…

“We expect actual home price performance to weaken further,” the Morgan Stanley report said. “Our analysis was performed on May home price data, which were affected by the strong gains in sales due to the expiration of the tax credit. With the weakness in sales that has since ensued, we expect home prices to weaken as well, further contributing to the double-dip effect we can already observe.”

When Morgan Stanley says there is a premium for short sales over foreclosures, what they are implying is that the Case-Shiller weighting formula incorrectly values short sales.

Remember:

Case-Shiller gives extra weight to sales where the exact home was sold before. They use all kinds of adjustments and tweaks to try and account for overly-improved or trashed homes.

If Case-Shiller weights short sales the same as foreclosures, this would help explain why the index shows more appreciation than we actually see in the market.

Take a poll of would-be real estate investors and the consensus would be that the time to buy long-term rental investments in low-end markets is here, or it is very close. Here in Northern California, investors are drooling over deals in places like Antioch, Concord, Stockton, and Modesto, where prices have already fallen 50-70% or more.

Unfortunately, the low-end market still has a few more years of price declines ahead. It is too soon to buy-and-hold invest in these areas.

Sure, there are some good real estate investments out there today, but there are going to be much better opportunities in the coming years. A patient investor will be rewarded.

Bullish Assumptions

Most real estate investors are passionate that prices will be stable or trend higher. They are physically and emotionally invested in that outcome. Here are some of the common bullish arguments and counter-arguments:

• The property gets positive cash-flow at today’s price.
  • Counter: Rents are falling as the economy and jobs flounder. See HERE, HERE, HERE, HERE, HERE, and HERE. What’s more, a lot of investors who think they have positive cash-flow have interest-only loans and/or aren’t accounting for maintenance or vacancy, etc. Today, most price-to-rent ratios still favor renters. Again, you could buy now and be fine…or wait and be better.
• Values are already down X, there is no way they’ll go down more.
  • Counter: Why couldn’t they?
• The purchase price is below construction/replacement cost.
  • Counter: So what? There is no reason why short/mid-term prices can’t be below construction costs. Most bubbly areas were tremendously overbuilt and could be in this situation for many years. Besides, land, labor, and construction materials costs have been plummeting, lowering the bar for what construction costs really are.
• Long-term demographics have not changed – there is still a shortage of housing.
  • Counter: Sure, if you wait long enough, you will show price appreciation. But, for the next 5 years or so, we have a huge shadow inventory to work through giving us way too much supply. This not only includes foreclosures, but all of the regular Sellers who have been waiting, all of the vacant property, and all of the approved construction projects not yet completed. Besides, who, besides investors, is going to buy all of these houses? The next generation of homebuyers has too much debt.
• Real Estate Prices have bottomed.
  • Counter: Government manipulation temporarily stopped the price tailspin, but prices have not yet had a chance to find their true, free-market bottom. Some economists are calling a bottom, but economists have been calling bottoms ever since we were at the top. Already, sales and prices have begun to turn back down and the second-half slowdown has begun. What natural economic forces are there to stop the decline?

Fundamentally, there is no reason why home prices can’t go lower, even in the most beaten-down communities. But will they?

Pushing on a String

Prices have already risen off the bottoms in the hardest-hit communities. Thanks to tax credits, low interest rates, and limited foreclosure activity, the supply/demand curve shifted, the downward spiral stopped, and prices have actually come up 10-20% in the past year.

But what will happen when the manipulation ends?

In Antioch and Pittsburg: Is the Worst Over?, I asked “is this a legitimate recovery? Or has the bubble been re-inflating?”

These charts clearly show the bubble building, the massive price collapse, and the impact of tax credits and foreclosure moratoria. Prices bottomed out about the same levels as they were in 1997 (which isn’t too far off from 1990), then began to grow again.

…

Without additional context, these charts would indicate a healthy turnaround in the housing market. Unfortunately, these charts don’t tell the whole story.

The whole story is that, within a few months of the 2008 foreclosure moratorium, supply quickly dwindled and prices stabilized. You can clearly see the downward price trajectory before the government got involved. As government intervention slowly fades, the downward price slide will resume.

Consider this chart from Government Details Housing Manipulation And What To Expect When It Ends.

Even with limited supply and 4.5% interest rates, sales volume is dropping. There aren’t even enough buyers at today’s prices to hold values steady. Imagine what will happen when housing supply eventually increases!

An Inside Look

I would argue that many of the people who think that now is the time to invest in the lower-end simply haven’t spent much time there. If they did, they would know that most of the residents are just barely hanging on.

If the economy continues to re-sour, a lot of people are going to lose their grip.

I used to live in the Central Valley and still have friends there. Here is a story of one of the most desirable streets in town, in an older, established area:

There is a house on a desirable, upper-middle-class street where the owner have stopped making payments. Business is down, the house needs some work, and the value is upside down. What was once worth $600,000 is now worth $300,000.

Directly behind them is a short sale where they owners bought in 2006 and haven’t made a payment in 2 years. The auction date is set for this month. Next to that house is a one that was owned by a realtor who walked away in 2008. The house has been vacant ever since with no NOD filed.

Next door is a vacant house. The owners were foreclosed on last month. He is a salesman and they have two young kids. Two doors down from there is a home that was foreclosed on 2 years ago (one of the first).

Across the street are two beautiful homes where the owners have decided to take jobs elsewhere. Both owe several hundred thousand more than their homes are worth and both intend to rent their homes out until things get better. Both will be losing at least $25,000-$35,000 per year as the rents won’t cover the costs. In time, one or both may walk away.

Further down the street is a businessman who thought he was conservative. He invested in a commercial property that went south and legal issues with the partnership have taken everything else. Unless the business climate improves quickly, this home could be another grim statistic.

Literally just about every other house in this neighborhood is at risk of foreclosure at some point in the next few years. And these are doctors and lawyers. Imagine how bad it is in less affluent pockets.

But it’s not just the Central Valley. It’s the Bay Area Bubble Towns of Antioch, Brentwood, Pittsburg, Livermore, Concord, East Palo Alto, etc.  Today, there are over 40,000 Bay Area homes in serious default, but where a Notice of Default has not yet been filed. This massive shadow inventory will haunt these communities and put downwards pressure on home prices for years to come.

Remember, 1-in-6 California mortgages are delinquent or in foreclosure.

There Is No Urgency

The bottom line is that there is no compelling reason to invest today and tie up capital. For most investors, the meager returns simply aren’t worth the opportunity cost of having that cash invested in such an illiquid asset.

With lower prices likely over the next 2-3 years, today’s investors will be rewarded for showing patience and restraint.

Homebuyers Seeking Tax Credit, Equity Sellers Fuel Quarterly Increase in Sales, Prices

 Homebuyers scurrying to meet the April 30 deadline to qualify for a federal tax incentive and a rising percentage of traditional equity sales sparked a sharp increase in the number of existing single-family detached homes sold in Sacramento County during the second quarter of 2010, according to a report by the research division of Prudential California Realty based on an analysis of MLS data.

Countywide, 4,920 detached homes changed hands in the second quarter – up 28 percent from 3,854 homes sold in the second quarter of 2009.  Stiffer competition for entry-level homes, the presence of cash buyers, and early signs that traditionally equity sellers are returning to the market helped stabilize the countywide median price of a home sold in the second quarter at $191,379, up 4 percent from the first quarter median sales price of $183,485 and 9 percent higher than the second quarter 2009 median price of $175,803. In June, 38 percent of homes sold involved non-distressed equity sales, up from 29 percent a year ago.  Accordingly, the percentage of bank-owned properties sold fell from 54 percent last June to 35 percent this June, while short sales have become more frequent, accounting for about 26 percent of sales this June, compared with 16 percent of sales a year ago.

All 12 Sacramento County communities included in the survey experienced sharp quarter-over-quarter increases in sales of existing detached homes.  The City of Sacramento accounted for 2,590 home sales for the second quarter, or 52 percent of the county total – up 28 percent from the first quarter but down 13 percent from a year ago.  Sales leaped by 51 percent on a quarterly basis in Orangevale, 34 percent in Elk Grove and 31 percent in West Sacramento.  On an annualized basis, sales were up in 10 of the 12 markets, led by Wilton (+27%), Rancho Cordova (+20%) and West Sacramento (+16%).

The median price of a home sold during the second quarter rose in seven of the 12 Sacramento County communities on a quarterly basis and in four communities compared with the year-ago period.  Among these, North Highlands registered a 25 percent year-over-year median price increase and an 8 percent quarter-to-quarter improvement, followed by Sacramento, where the median sales price was up 17 percent year over year and climbed 9 percent from the first quarter.  Only Wilton experienced a significant year-over-year decline in median sales price, falling by 23 percent compared with a year ago.

Peak-season homebuyers can look for competition on properties that have been well-maintained or refurbished by investors and returned to the market.  Homebuyers interested in a home that requires repairs or updates will want to look into the FHA 203k loan, which offers a low down payment bundled with a home renovation allowance.

clear skies,

doug reynolds

www.SellWithDoug.com

The U.S. economy slowed significantly from Q1’s 3.7% pace.

From the BEA:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.4 percent in the second quarter of 2010, (that is, from the first quarter to the second quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.7 percent.

The New York Times adds:

This slowdown, coupled with disappointing job creation, has led to worries that the recovery is losing steam. The nation’s unemployment rate continues to linger just below 10 percent. Some forecasters have predicted even slower growth in the second half of the year, perhaps close to an annual rate of 1.5 percent. Some of that drag will be due to the withdrawal of stimulus-related policy measures, and some to the fact that many businesses have already refilled the stockroom shelves that they whittled down during the crisis.

At that pace of total G.D.P. growth, it may be years before the economy returns to the trend it was on before the financial crisis hit.

“Given how weak the labor market is, how long we’ve been without real growth, the rest of this year is probably still going to feel like a recession,” said Prajakta Bhide, a research analyst for the United States economy at Roubini Global Economics. “It’s still positive growth — rather than contraction — but it’s going to be very, very protracted.”

Calculated Risk adds:

A few key numbers:

“Real personal consumption expenditures increased 1.6 percent in the second quarter, compared with an increase of 1.9 percent in the first.”PCE is slowing.

Investment: Nonresidential structures increased 5.2 percent, in contrast to a decrease of 17.8 percent. Equipment and software increased 21.9 percent, compared with an increase of 20.4 percent. Real residential fixed investment increased 27.9 percent, in contrast to a decrease of 12.3 percent.Residential investment was boosted by the tax credit and will decline in Q3.

“The change in real private inventories added 1.05 percentage points to the second-quarter changein real GDP after adding 2.64 percentage points to the first-quarter change.”That is probably the end of the inventory adjustment.

Here is a graph from The Atlantic:

Consumer Confidence slipped in July to a reading of 50.4, slightly below expectations. June’s reading was 54.3.

The Conference Board reports:

The Conference Board Consumer Confidence Index^® which had declined sharply in June, retreated further in July. The Index now stands at 50.4 (1985=100), down from 54.3 in June. The Present Situation Index decreased to 26.1 from 26.8. The Expectations Index declined to 66.6 from 72.7 last month.

…

Says Lynn Franco, Director of The Conference Board Consumer Research Center: “Consumer confidence faded further in July as consumers continue to grow increasingly more pessimistic about the short-term outlook. Concerns about business conditions and the labor market are casting a dark cloud over consumers that is not likely to lift until the job market improves. Given consumers’ heightened level of anxiety, along with their pessimistic income outlook and lackluster job growth, retailers are very likely to face a challenging back-to-school season.”

Consumers’ assessment of current conditions was more downbeat in July. Those saying conditions are “bad” increased to 43.6 percent from 41.0 percent, however, those saying business conditions are “good” increased to 9.0 percent from 8.4 percent. Consumers’ appraisal of the job market was also more negative. Those claiming jobs are “hard to get” increased to 45.8 percent from 43.5 percent, while those saying jobs are “plentiful” remained unchanged at 4.3 percent.

Consumers’ short-term outlook also deteriorated further in July. The percentage of consumers expecting an improvement in business conditions over the next six months decreased to 15.9 percent from 17.1 percent, while those anticipating conditions will worsen rose to 15.7 percent from 13.9 percent.

Consumers were also more pessimistic about future job prospects. Those expecting more jobs in the months ahead decreased to 14.3 percent from 16.2 percent, while those anticipating fewer jobs increased to 21.1 percent from 20.1 percent. The proportion of consumers expecting an increase in their incomes declined to 10.0 percent from 10.6 percent.

Bloomberg notes:

The measure averaged 98 during the expansion that ended in December 2007.

It’s hard to imagine much of a recovery if consumers aren’t confident enough to start spending money again…

According to the most recent Case-Shiller report, home prices in the San Francisco Metropolitan Area were up 18.3% from May 2009 to May 2010.  On average, national home prices were up an 5% during this stretch…so why did the Bay Area’s home prices go up so much more?

Or did they?

Check out this chart from the Wall Street Journal. The San Francisco MSA showed by far and away the biggest price gains of in the country.

More Than a Changing Mix

But are real home prices really 18.3% higher than a year ago? It certainly doesn’t pass my sniff test.

First, know that Case-Shiller does NOT measure the median price, which can easily be distorted by a changing mix of sales. Instead, they focus on repeat sales of the same property:

To calculate the indices, data are collected on transactions of all residential properties during the months in question. The main variable used for index calculation is the price change between two arms-length sales of the same single-family home.

…

For each home sale transaction, a search is conducted to find information regarding any previous sale for the same home. If an earlier transaction is found, the two transactions are paired and are considered a “repeat sale.” Sales pairs are designed to yield the price change for the same house, while holding the quality and size of each house constant.

…

Each sales pair is aggregated with all other sales pairs found in a particular MSA to create the MSA-level index. The 10 and 20 Metro Area Indices are then combined, using a market-weighted average, to create the Composite of 10 and the Composite of 20.

For more detail, Case-Shiller also breaks down each MSA into price tiers and tracks the performance of the top, bottom, and middle thirds. One would think that these tiers would reflect the 18.3% boost, but, strangely, they don’t.

By my calculations, the lower third has appreciated by 14.9%, the middle third by 12.8% and the top third by just 8.3%.

These numbers certainly seem more believable (at the lower tier anyway).

But, if no segment of homes even appreciated by 15%, how can the index say that the MSA appreciated by 18.3%?

Case-Shiller Breaks Down

Clearly, there are fundamental flaws with the Case-Shiller formulas…but it’s beyond me to try and fix them.

Here’s a sample:

Improper Weighting?

Case-Shiller gives extra weight to sales where the exact home was sold before. They use all kinds of adjustments and tweaks to try and account for overly-improved or trashed homes.

Consider that the AVERAGE price level of the 3 tiers in May of 2009 was 124.97, while the aggregate reads 120.79. Clearly, the aggregate is giving extra weight to the lower tiers.

In May 2010, the AVERAGE price level of the 3 tiers is 139.67, yet the aggregate reads 142.99. Clearly now, the aggregate is giving extra weight to higher-priced sales.

In 2010, the weighting metrics are favoring higher-prided homes as “better” comps…but why?

Is it possible that the extreme home improvement and the extreme foreclosures in the Bay Area are skewing Case-Shiller’s numbers?

My Sniff Test

I would accept that the home prices for the lower third have come up anywhere from 15-20% in the past year. A reduced supply of foreclosures for sale and increased demand with tax credits and low interest rates have lead to bidding wars.

I would also believe that home prices for the middle third of Bay Area homes appreciated by 10%, pushed up by the same forces.

However, I find it harder to believe that higher-end Bay Area homes have appreciated by 8.3%. I don’t even think you’ll find many optimistic homeowners who would be so bold. In the 600s-700s, maybe there has been a little appreciation. But prices have been flat to down slightly up to 1M. Much over that, and prices have most certainly declined.

CA Notice of Defaults Chart From DataQuick

Robert Selna of the SF Chronicle reported that the number of CA homeowners headed to foreclosure dropped in the second quarter of the lowest level in 3 years.

Moderately priced areas seemed to have seen the lowest level of foreclosures. Many of the moderatly priced areas were the first to be hit hard with the wave of foreclosures, so it is not terribly shocking to see that these areas would also see the first slow down of the rate of foreclosures.

According to Data Quick, a San Diego research firm following the real estate trends, indicates that the Bay Area did not see the precipitous reduction in defaults as other parts of the state, but they have declined significantly from a year ago.

The findings seem to indciate that some of the efforts of the fedearl government and an increasing number of lenders are willing to work with distressed homeowners on loan modifications and short sales. This in turn helps to reduce the number of foreclosures. 

A slight increase in Bay Area housing price over the past several month is also helping. According Andrew LePage, analyst with DataQuick, “The market does seem to be playing some role in this,” LePage said. “It seems to be stabilizing, and if it keeps creeping up, even a little bit, more and more people no longer will be underwater, giving them incentive to hang on or do a short sale.”

In the Bay Area the notice of defaults declined 38.80% from the same time last year. In San Francisco County the notice of defaults decreased by 26.80% with 431 notice of defaults filed down from 589 from a year ago. In Alameda County the notice of defaults declined by 43.3% with 2,615 notice of defaults filed down from 4,616 a year ago.

Although moderately priced areas are seeing a reduction in the number of defaults, the higher end market seems to be taking more of a hit. Many of the higher priced area codes are starting to see and increase in the number of defaults.

Tens of thousands on Bay Area homeowners are behind on their mortgage payments, but have not yet received a Notice of Default that would officially start the foreclosure process.

Some are attempting short sales. Some have walked away. Some are living for free until they are kicked out. Some are trying to get a loan modification and were told that they had to be delinquent on their mortgage to qualify. Many will eventually end up being foreclosed, but we don’t really know what percentage it will be and we don’t know how long the banks will drag out the process.

These homeowners, or “homeowers”, contribute to the Bay Area’s shadow inventory of homes that looms over our market and threatens to break the fragile balance that is currently keeping home prices fairly level.

Sunday’s Contra Costa Times reported 40,283 of our neighbors are in mortgage limbo

Tens of thousands of Bay Area homeowners are trapped in a bizarre real estate limbo, living in houses but no longer paying for them, waiting and wondering if someone will help them — or throw them out.

Some are victims of their own economic circumstances, unable to afford their mortgages and expecting to lose their homes if they can’t get breaks from their banks. Others are opportunists, choosing not to spend on a house worth less than they owe. Instead, they can live rent-free until their lender makes a move.

The limbo phenomenon is a radical departure from previous real estate crashes, when there were far fewer troubled loans and banks moved speedily on those who fell behind on payments. Now many lenders simply can’t keep up, and others appear reluctant to flood a weakened market with foreclosed homes.

It all adds up to lingering instability for the Bay Area housing market, as lenders slowly work through the backlog while homeowners endure uncertainty that could last months or even years.

Years are more like it. Remember that the backlog started building in August of 2008 with the first of many moratoria.

An estimated 40,283 homeowners across a seven-county region spanning the East Bay, South Bay and the San Francisco metro area were at least three months behind on their mortgages but not yet in foreclosure as of April, according to CoreLogic, which tracks mortgage performance data. That’s about 4.5 percent of total mortgages in those areas, and a drastic increase from 0.25 percent in January 2007. In the East Bay in early 2007, 1,435 loans were more than 90 days late but not in foreclosure. In April of this year there were 23,155. In the San Jose metro area, the total grew from 513 in January 2007 to 11,558 in April.

These are enormous numbers when you also consider that this only represents a small slice of would-be foreclosures. There are no doubt many tens of thousands more homeowers who have received a NOD but nothing else has happened.

Nationwide “roughly 3.5 million loans are in this limbo land, and are not proceeding through very quickly. It could take years,” said Sam Khater, an economist with CoreLogic, which tracks mortgage performance. “I have a feeling it’s going to follow the path of unemployment and have a long tail.”

…

Khater said many lenders are moving slowly because they hope the government will eventually step up to help cover their losses. They also may be hoping an economic recovery will allow many borrowers to catch up with their payments, but “they’re going to be waiting a while,” he said.

The banks are clearly dragging out the process at the direction of the government.  Geithner, Summers, Bernanke, and the rest are orchestrating this slow-down. If any one big bank starting dumping property, the others would jump in to avoid being left holding the bag.

Critics of loan-modification programs say that the housing market would be better served if foreclosures moved more quickly and that any resulting drop in home prices is necessary to reset housing values to their pre-bubble levels. Allowing delinquent homeowners to remain in their homes for months or years means many of the owners will stop maintaining their properties, which hurts their neighborhoods, and their own delinquency may even encourage neighbors to default, prolonging the housing market’s pain, some say.

A better way of critiquing loan modification programs is that they are confusing the cure and the disease. They feel that foreclosures are the disease and stimulus, bailouts, and modifications are cures. But the truth is that excessive debt is the disease. Foreclosures (and bankruptcies) are the cures.

Jobs aren’t enough

There’s another unfamiliar wrinkle in delinquency trends now, said Hans Johnson, who studies housing at the Public Policy Institute of California. Any time unemployment rises, mortgage delinquency does too, he said, just as it has in the past few years. But this time around “even people who are employed are debating whether to keep paying the mortgage because they’re so far underwater,” he said.

New research from consulting firm Oliver Wyman found among borrowers nationwide who defaulted in the first half of 2009 and remained in default at the end of last year, 19 percent could have afforded to keep paying. In June, mortgage financing company Fannie Mae said it would punish such strategic defaulters by prohibiting them from getting a Fannie-backed loan for seven years after their foreclosure, instead of the typical five.

…

There’s no survey data on the demographics of nonpaying homeowners. But with unemployment and recession affecting all socioeconomic levels, the nonpaying phenomenon spans poor neighborhoods and rich ones, from tiny condos to multimillion-dollar houses, said Jon Maddux, CEO of YouWalkAway.com. The company provides legal and financial advice to homeowners who’ve stopped paying.

Maddux said defaulting is one way owners have of “lashing back” at lenders when they’ve been frustrated by a lack of response or denial of their loan modification. He rejects the notion that borrowers have an ethical obligation to keep paying, saying mortgages are contracts that specifically include language about what happens if the borrower stops paying.

“We’ve made it so sacred to pay your mortgage, when it shouldn’t be that way. People shouldn’t make their families suffer to pay a mortgage that has an exit strategy in the contract,” he said, referring to foreclosure.

Over the next 2-4 years, social attitude towards strategic default will have a huge impact on Bay Area Home Prices. If walking away from your mortgage becomes socially acceptable in mid-high priced communities, that shift can be contagious. Not only could more people choose to walk away, but people could become much more averse to talking on huge mortgage debts in the first place.

The Contra Costa Times’ figure of 40,283 delinquent homeowners doesn’t mean that all of these people will lose their homes. But if you are a Bay Area homeowner who is falling behind, you can take some comfort from the fact that many of your neighbors are in the exact same situation.

Call them what you want…the Plunge Protection Team, The Powers That Be, or simply Government Sachs…but somewhere the decision continues to be made to not foreclose on very many homes.

The shadow inventory is growing daily, but as long as we don’t actually foreclose on houses, maybe we can pretend, at least for a little while longer, that the problem isn’t really there.

DataQuick reports California Mortgage Defaults Hit Three-Year Low

The number of California homes pushed into the formal foreclosure process between April and June dropped for the fifth consecutive quarter to the lowest level in three years. The declines were greatest in the most affordable areas, where foreclosure activity continues to fall from extremely high levels over the past two years, a real estate information service reported.A total of 70,051 Notices of Default (“NODs”) were filed at county recorder offices during the April-to-June period. That was down 13.6 percent from 81,054 for the prior quarter, and down 43.8 percent from 124,562 in second-quarter 2009, according to San Diego-based MDA DataQuick.

Last quarter’s total was the lowest since second-quarter 2007, when 53,943 NODs were recorded. The peak was in first-quarter 2009 when 135,431 homeowners received foreclosure notices.

“Obviously, motivated sellers and accommodating lenders have played a part in bringing the default filings down, especially when it comes to short sales. Public policy has also been a factor. We also need to remember that prices have come up off bottom over the past year. If they continue to rise, fewer homeowners will find themselves under water, which is a significant factor in letting a home go,” said John Walsh, DataQuick president.

The NOD is the first step in the foreclosure process. This official notice can be filed when a homeowner is 30 days late on a payment, but often isn’t filed for 6 months or more (even 2 years in some cases!). After the NOD, the bank must wait 120 days before filing a Notice of Trustee Sale (NTS), then another 21 days before actually “selling” the home on the courthouse steps.

The fact that NOD’s are plunging  implies that, even by the start of 2011, we still won’t see an increase of foreclosures for sale. The banks and government are committed to extend-and-pretend policies and I wonder how long they can keep it up. It’s already been 23 months…

HAMP is continuing to lose steam as fewer homeowners are applying for modifications.

From The Treasury: Servicer Performance Report Through June 2010

More Than 50,000 New Permanent Modifications in June

• Total number of permanent modifications increases nearly 15%, with growth in permanent modifications averaging more than 50,000 per month over the last six months.
• Homeowners in permanent modifications are experiencing a median payment reduction of 36%, more than $500 per month.
• Homeowners in permanent modifications are guaranteed lower payments for five years, then fixed terms at today’s low rates for the life of the loan.

Servicers Continue to Work Through Aged Trial Population

• Cancellations continue to rise as servicers comply with Treasury guidance to make decisions on aged trials. Of the newly canceled trials this month, more than 60% had been in trial six months or longer.
• Servicers are still completing their reviews of nearly 166,000 active trials lasting six months or more.
• Approximately 45% of homeowners in canceled trials entered an alternative modification, based on survey data from the eight largest HAMP participants. Fewer than 2% of homeowners in canceled trials went to foreclosure sale.
• The most common causes of cancellations include incomplete documentation, missed trial payments, or mortgage payments already less than 31% of the homeowner’s income.

There are now about 364,000 active trials, down from 467,000 last month. Cancellations have jumped from 521,000 from 430,000 last month. For the last couple of months, HAMP has been expelling more homeowners than it absorbs.

The pace of new trial modifications has come to a near-halt, with just 15,000 new trials started in June.

This is a sign that either applicants are being screened more carefully, or that there are simply fewer homeowners applying.

Some Good News

Some good news from this report is that an additional 53,000 homeowners received permanent modifications. Of these, 100% received some sort of interest rate reduction, 56% received a term extension, and 29% received principal forbearance.

Debt Ratios

Back-end debt ratios continue to climb for borrowers. The median back-end debt-t0-income ratio for permanent mods began at an astounding 79.9% and was modified to 63.7%.

Calculated risk adds “And that is the median – and just imagine the characteristics of the borrowers who can’t be converted!”

Additional Perspective

Felix Salmon points out that of nearly half of the canceled modifications are getting “alternate modifications” from the servicers themselves.

The first thing to note is that the enormous number of failed trials — to put the number in context, there were only 299,092 permanent modifications started through April — is not a sign of good news, where the borrowers have exited the trial by paying off their mortgage. That only happened 1.1% of the time.

Instead, depressingly, by far the most common reason for abandoning the HAMP trial is “Alternative Modification” (48.9%). Cue desperate Treasury spinning, in a press release entitled “Impact of Administration Efforts Seen in Signs Of House Price Stabilization and Increased Affordability”:

Nearly half of homeowners unable to enter a HAMP permanent modification enter an alternative modification with their servicer, and fewer than 10 percent of cancelled trials move to foreclosure sale.

Remember that in these cases the HAMP modification is not only subsidized by the government: it was also entered into, after enormous amounts of paperwork, by both the borrower and the servicer. It’s hardly credible that after going through that laborious process, both of them would happily tear up the agreed-upon modification and enter into something more mutually beneficial instead.

Rather, I see here evidence that the HAMP modifications are so weak and so unhelpful that there’s far too little incentive for borrowers and lenders to stay in them. And of course we know why that would be: such modifications almost never make a significant dent in the principal amount outstanding, and as a result homeowners who are underwater on their mortgage simply remain underwater on their mortgage, with the concomitant enormous probability of redefault.

This is disappointing on two levels. First, it suggests that perhaps servicers aren’t trying all that hard to make HAMP mods work, probably because HAMP dictates some protections and standards for the borrower. Second, the “alternate modifications” are likely more short-term and probably favor the bank much more than the borrower.

It stands to reason that redefault rates for these alternate modifications will be significantly higher than for HAMP mods.

A reporter called yesterday morning to ask me about the rising real estate prices and market recovery in Sacramento. After all, our Trendgraphix reports show a 42% increase in pending sales for June. That’s the message delivered by Lyon Real Estate. However, inventory is up about 8% and sales are down by 2%. The average per-square-foot price also dropped by 2% to $125. The reporter asked me to comment on our market stabilization in Sacramento.

Much as I would like to paint a rosy picture of the real estate market in Sacramento, I have to call it the way I see it. And I don’t see a big recovery. In fact, I see prices falling. I haven’t heard much about this elsewhere but it’s going on, I’m telling you. Just wait a few months. You’ll see.

In the first half of the year, I could slap a price on my short sale listings close to the prices of comparable sales and expect to get it. MLS reports that more than half of the listings in Sacramento right now are short sales. However, when I pull up the listings and sales for any given area with a lot of short sales, what I see are the active listings, active short contingent listings and pending listings all priced LESS than the comparable sales. What does that tell you?

It tells me that I’m going to have a heck of a time arguing with agents who are doing BPOs for the banks on my Sacramento short sales. Because those agents will consider the comparable sales, which appear to have very little bearing on market movement. I don’t like it when the comp prices are higher than the activity in the marketplace, in part because people can’t think upside down. But also because it means that prices are falling. You just don’t see it yet.

As a Sacramento short sale agent, it doesn’t really matter to me personally which way the market moves because, like Eddie Murphy in Trading Places, there is always movement. I don’t control it. I can’t control it. I just go with the flow and sell those listings.

It’s a squirrelly market, and that’s what I told the reporter. I said, “Among those who qualified for the home buyer tax credit, anybody with half a brain already bought before June.” She probably thought that I said the market was full of squirrels, I guess, which wasn’t really what I meant. It’s that the buyers who didn’t qualify for or missed the tax credit now want to compensate for that loss by slamming those list prices. They want some assurance against future market fluctuation. And who can blame them, really?

Photo: Trendgraphix

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Elizabeth Weintraub is an author, home buying columnist for The New York Times-owned About.com, a Land Park resident, and a Land Park real estate agent who specializes in older, classic homes in Land Park, Curtis Park, Midtown and East Sacramento. Weintraub is also a Sacramento Short Sale agent who lists and successfully sells short sales throughout Sacramento. Call Elizabeth Weintraub at 916.233.6759. Put 35 years of real estate experience to work for you. DRE License # 00697006.

The Short Sale Savior, by Elizabeth Weintraub, available through bookstores everywhere and at Amazon.com.

Photo: Unless otherwise noted in this blog, the photo is copyrighted by Big Stock Photo and used with permission.

The views expressed herein are Weintraub’s personal views and do not reflect the views of Lyon Real Estate.